Reflections on a Ditchley conference "The New Economic Insecurity"

By conference rapporteur Steven Pearlstein 

We can confidently say that the pandemic has given everyone a heightened appreciation of economic security and how unevenly it is distributed. And for those who have been concerned about these issues for a long time, it also offers a political moment of opportunity to push them to the forefront of the political conversation and finally do something about them.  Given our fractured and somewhat dysfunctional politics, that doesn’t guarantee success. But it has revealed a rather significant reservoir of kindness that exists in our body politic, a reservoir that we can now draw on to make some important structural change in the way we organize our economic activity.   

That said, we ought not to fall into the trap of overplaying our hands, of thinking we will be able to use this crisis to solve every problem, from climate change and human trafficking to excessive consumerism and unsustainable levels of public and private debt. The pandemic has revealed the vulnerability of many of our jobs, our incomes, our savings, our pensions and the economic safety for those who find themselves without a job. We would do well to focus on securing those things, for which there is broad consensus, rather than assuming that the pandemic has suddenly and magically delivered us into a progressive nirvana.  

The evolution of the modern economy has been a deliberate, steady march toward economic insecurity. 

In the beginning, we were all hunter gathers, living at a level barely above subsistence but with a reliable source of food and water and other things that we needed to maintain that standard of living. That was followed by the agricultural revolution, which significantly raised the amount and variety of food people had, and freed others up to make other things like clothes and tools and beautiful cathedrals.  Because of specialization and exchange, we got richer and most of the time enjoyed a higher standard of living.  But in the process, we also made ourselves more vulnerable to drought, floods, plagues and other unpredictable and uncontrollable acts of nature that left us less economically secure.  

Then came the industrial revolution, and once again new technology made it possible for us to be richer and more productive.  But it also brought recessions and financial crisis and what Schumpeter famously called the gales of creative destruction as old products and technologies and companies were constantly replaced with new ones.  

Now, perhaps, globalization and the digital revolution have brought us to a new inflection point—one that started around 1980 and has brought not only greater wealth and a higher standard of living for billions of people around the globe, but new sources of insecurity and inequality.   

In many instances, there is a tradeoff between how rich a country is—the amount of income it produces—and the amount of economic security it can offer to its citizens.  And what that means is that if a country now decides that it wants more economic security, then it should understand that it may well have to accept a somewhat lower standard of living.  Getting political consensus for it—that is the political challenge.  

Over the years, we have developed pretty good tools and institutions to minimize economic insecurity.  

The French have learned how to guarantee every worker job security, not only through labor laws but through a powerful union movement.  But this has come at a significant cost in terms of less entrepreneurship and innovation and investment and creating an insider-outsider labor market that leaves young people with high rates of unemployment. 

By the same token, we know how to ensure no worker loses a job or suffers stagnant wages because of imports and foreign competition—just opt for closed economy, with import quotas and high tariffs.  In that case, the cost of that security is borne by consumers in the form of higher prices, lower quality and less choice in the goods they are able to buy.    

We know how to provide universal health care to every citizen, eliminating the threat that a disease will bankrupt your household.  But we also know that universal health care requires diverting anywhere from 8 to 18 percent of national income and can create systems rife with inefficiency and moral hazard. 

We know how to provide income security to people who lose their jobs, but we also know that if you make unemployment benefits too generous and long lasting, it costs employers and still-employed workers money and can reduce people’s incentive to find and take a new job.  

And we know how to provide income security for old people through some combination of private or public pension plans.  But we also know that the taxes or pension contributions needed to fund them require us to cut back on investment and accept a lower standard of living today.   

In the past, much of this economic security—and this is particularly true in the United States—was provided by employers, based on an industrial model that dates to the first half of the 20th century.  No workers have ever enjoyed more equal economic security than those who worked for Fortune 500 company of 1964—by today’s standards, these were socialistic institutions.  Companies like AT&T and IBM and TWA and General Motors effectively offered their employees lifetime employment.  They paid above market wages for workers on the bottom half of the skills level—their janitors and secretaries earned twice as much as janitor and secretaries at smaller firms.  They provided life insurance and workers compensation insurance and health and dental insurance with no employee cost sharing. That was the golden age of income equality and economic security—but it was only possible because of imperfect competition that allowed those companies to charge customers inflated prices for not so great or innovative products and earn inflated profits that they were willing to share with their workers. 

That came to an end with globalization and deregulation.  Suddenly those companies were no longer able to overcharge their customers for so-so products, and no longer earned the oversized profits that they could share with their workers. There are still some companies that are able to offer their full-time employees that kind of economic security—think of Google or Facebook or Microsoft—but only because, for the moment, they too enjoy the benefit of monopoly-like prices and profits. 

So in thinking about economic insecurity, the trick is finding the right balance, the best trade-offs between individual economic security and collective economic dynamism. And that task is complicated by the fact that what is the right balance and best trade-offs for one country or one culture or one period in history might not be right for other countries or culture or eras.  

Our challenge, however, isn’t simply to figure out the right trade-offs—it is also to figure out the right instruments and institutions to effectuate it. 

There is a feeling expressed by some that the loss of economic insecurity is something that businesses have done to us and that what we need to do is come up with a better, tougher set of laws and rules and regulations that will restrain their greed and once again require them to provide us with the security we want and crave.  

At the same time, we should remember the problems that arise when regulation becomes too prescriptive, too inflexible, too hard for government to administer and enforce.  Sometimes, what works better is when people vote with their feet—when consumers and workers and investors make it clear that they expect companies to adhere to certain norms of social responsibility and that they will refuse to do business with those that don’t. 

I can’t tell you how it is that social and business norms evolve – it’s rather magical, or random, or both.  One day Harvey Weinstein and the me-too movement comes along and what had once been widely accepted or tolerated behavior in the work place finally becomes utterly unacceptable.  One day Amazon is defending its right to pay its warehouse workers whatever the market will bear, and the next day it announces that it is embracing a $15 an hour minimum wage and urging other companies to do the same.  One day the Business Roundtable is stoutly defending the idea that companies exist to maximize profits and the next it embraces the idea that all stakeholders must be served.  

The good news is that, over the last five years, all of this has been moving in the right direction.  And the impetus, I think, comes from two places.  It comes from social media that has become extremely powerful in giving consumers a stronger voice in shaping corporate behavior.  And it comes from a younger generation of employees—particularly highly sought-after employees, who have decided that they simply won’t work for companies they consider to be socially irresponsible.  Together, employees and consumers are dramatically changing the norms of acceptable business behavior.   

Are there recalcitrant, outliers and lapses in the behavior of those who claim to have seen the light?  Sure.  But there is now a lot of momentum behind this. Things are now moving very fast.  And what we know from history is that when the norms change, the change in the laws and rules and regulation can’t be far behind.  The bottom-up is leading to the top-down.  Britain recently had a conservative chancellor who promised to raise the national living wage.  And in the US, we’re talking seriously about universal health coverage and wage supplements and living wages and stakeholder capitalism, all of which seemed like liberal fantasy only a few years ago.  

There is another question we have to address:  what institutions should we look to to provide economic security? 

In the past, we have relied on employers to provide us with much of the economic security we crave, either through the pay and benefits and terms of employment they provide or the taxes they pay to the government to provide these benefits. 

But in a globalized economy, where the rules and norms and prevailing wage levels and tax burdens vary widely from country to country, it is becoming harder for companies to finance this security and still remain competitive.  So we have to ask—and this is particularly a question in the United States—whether we should start to relieve companies of providing this security directly, and instead look to the government to provide it to all workers, irrespective of what company they work for, what pay they command or what terms of employment they have. 

I’m talking about a move away from private pensions and in the direction of higher universal public pensions.  I’m talking about unemployment benefits that are available to all workers who lose their jobs, including contingent workers.  I’m talking about universal parental leave policies where it is the government, not the individual firm, that shoulders the financial burden. I’m talking about tax subsidies to companies that share profits widely with employees. And in the United States, I’m talking about ending the employer-based system of health insurance in favor of a system in which all citizens are entitled to buy a comprehensive insurance policy from a government subsidized and managed exchange. 

And what happens if some countries try to gain competitive advantage by offering their workers lower levels of economic security, adopting lax rules or lower taxes?  Then we probably need to think about a different kind of trading regime in which tariffs are used to level the playing field to some degree.  That doesn’t mean a level playing field in terms of wages—we can’t export the minimum wage of industrialized countries to developing countries.  But we surely can insist that other countries conform to international norms and standards in terms of worker health and safety, in terms of taxation of business profits and capital income, in providing citizens with basic health care, pensions and income support—the “dues of a civilized society.”  And one way to make that happen would be to insist that the cost of paying those dues are included in the cost of the goods we import.  

Such tariffs would be controversial and would require a significant revision of the rules of international trade, but if we’ve learned anything from the last 20 years, it is that globalization of finance and trade can lead to a race to the bottom if we don’t put in place the institutional architecture to prevent it.  We need to better balance the economic and moral imperative to allow the billions of people in the developing world to lift themselves out of poverty with the economic and moral imperative of the developed world to provide economic security and opportunity to all of its citizens.  That doesn’t require us to abandon globalization or market capitalism, but it does mean that we need to tweak them so that prosperity and economic security are more widely shared.  We need to do that not only because it is the right thing to do.  But we also need to do it because if we don’t, the social discord and political dysfunction and erosion of trust that results will conspire to undermine our prosperity, undermine our security and undermine our democracy.  

Steven Pearlstein is a Washington Post economics columnist and Robinson Professor of Public Affairs at George Mason University.  He is also author of Moral Capitalism, published by St. Martin’s Press.